Rating Action: Moody's revises Northern Illinois University's outlook to positive; affirms Ba2 and Ba3Global Credit Research - 01 Feb 2022New York, February 01, 2022 -- Moody's Investors Service has revised Northern Illinois University, IL's outlook to positive from stable. We have also affirmed the university's outstanding Ba2 issuer rating, Ba2 Auxiliary Facilities System, and Ba3 Certificates of Participation. The university had approximately $284 million of outstanding debt at the end of fiscal 2021.RATINGS RATIONALEThe outlook revision to positive reflects improving operating performance, driven by federal relief and operating expense reductions, as well as potential for enrollment growth. After two years of moderate operating deficits, fiscal 2021 operations were nearly balanced, with a small deficit to potentially balanced operations projected for fiscal 2022 and beyond. Northern Illinois University (NIU) favorably had double-digit first-year enrollment growth in the fall, continuing a five-year upward trend. The positive outlook also reflects the improved credit quality of the State of Illinois (Baa2 stable), with prospects for continued on-time payments from the state and growth in operating appropriations in the near-term.The affirmation of the Ba2 issuer rating reflects continued constraints because of NIU's heavy reliance on the State of Illinois (Baa2 stable) for operating support and a highly competitive student market. NIU receives approximately 40% of its revenue from the state, which faces significant long-term fiscal challenges despite recent improvements, making the university vulnerable to future funding volatility. Student charges historically account for over 40% of revenue, a source that has been significantly pressured because of enrollment losses. And, while operating performance has recently strengthened, improvement is bolstered by non-recurring federal pandemic support with longer-term performance reliant primarily on NIU's ability to generate revenue from student charges, increased state support, and cost containment efforts. Additionally, the university's capital spending has been below depreciation for multiple years, resulting in an elevated age of plant, which could erode the university's already challenged brand and strategic positioning over the long term. Other favorable credit factors considered include a relatively sizable scope of operations and very good overall wealth. An offsetting consideration is still relatively thin liquidity.The Ba2 rating on the auxiliary facilities system (AFS) revenue bonds incorporates the university's Ba2 issuer rating as well as the broadness of the pledge and available financial reserves. The certificates of participation (COPs) are rated one notch below the issuer and auxiliary facilities bond rating due to the contingent nature of the obligation.RATING OUTLOOKThe positive outlook reflects prospects for credit improvement if the university is able to maintain continued operating performance stability, driven by increased state funding and enrollment growth. It also reflects Moody's expectations that management will continue working towards a goal of modifying NIU's footprint and cost structure to reflect student demand and operating revenue.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Sustained strengthening of operating performance resulting in improved liquidity- Improvement in the state's fiscal condition, improving NIU's operating environment- Evidence of enrollment stabilization and net tuition revenue growthFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Weakening of the State of Illinois' fiscal condition resulting in uncertainty surrounding direct operating support and on-behalf payments- Return to moderate operating deficits, pressuring the university's liquid reserves- Inability to curb overall full-time equivalent enrollment lossesLEGAL SECURITYThe Auxiliary Facilities System Revenue bonds are secured by the sum of net revenue, pledged fees and pledged tuition. Net revenue, pledged fees and pledged tuition are covenanted to be adjusted in amounts that will maintain 2.0x maximum annual debt service (MADS) coverage. Pledged fees are derived from the system and may be adjusted to reflect actual and projected fee increases. Inclusive of the system's net revenue, pledged fees, and pledged tuition, fiscal 2020's coverage far exceeded its covenant requirement with MADS coverage at 12x.The Series 2014 COPs are payable from state appropriated funds and budgeted legally available funds of the board. Legally available funds include student tuition (subject to the prior pledge for AFS revenue bonds), certain fees, certain investment income, and indirect cost recoveries on grants and contracts. The board is required to transfer pledged tuition to pay for the operating and maintenance costs of the AFS if AFS revenues are insufficient, and these expenses have a priority position over debt service for the COPs. The COPs are unsecured, and the installment agreement can be terminated in the absence of budgeted legally available funds, resulting in a weaker security than the secured pledge provided to AFS bonds.PROFILENorthern Illinois University is a multi-campus public university with its main campus in the City of DeKalb, IL (A2), and three satellite campuses that primarily serve graduate students. The university has a broad array of undergraduate and graduate academic programs, including concentrations in education, business, engineering, health and human science, law, and visual and performing arts. Fall 2021 total full-time equivalent student enrollment was 13,153.METHODOLOGYThe principal methodology used in these ratings was Higher Education Methodology published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1257002. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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